E*Trade expands derivatives offerings via acquisition of OptionsHouse
Sometimes it's better to buy than build. That is what E*Trade Financial chose when it announced an agreement to buy OptionsHouse, an electronic brokerage that specializes in retail options trading. E*Trade, one of the powerhouses in the online stock brokerage business, realized it had fallen behind its rivals in terms of futures and options trading, and decided to get back in the game by plunking down $725 million for the Chicago-based firm.
"Upping our options capability has long been a goal of ours, as we relinquished a strong industry position in 2009, giving way to a competitor who completed an acquisition of an options-centric platform," said then-CEO Paul Idzik on the call. "And while today we execute around 20% of the retail market’s options contracts, and nearly a quarter of our customer trades are in options, our growth in the product leveled off some time ago."
Idzik added that the company had considered stepping up its investments in building its in-house options capability, but decided that buying an established platform would be a more efficient solution. Idzik explained that the deal would allow E*Trade to deliver a sophisticated platform for trading options, which he described as "an increasingly attractive value proposition" for retail investors.
E*Trade's main rivals, TDAmeritrade and Charles Schwab, made similar moves several years ago, forcing E*Trade to play catch-up. TDAmeritrade bought thinkorSwim for $600 million in 2009, and today 31% of the entire firm's trades come from options and another 11% from futures. Charles Schwab bought OptionsXpress for $1 billion in 2011. That brought capabilities not only in equity options but also futures and options on futures, which account for around 20% of trading at OptionsXpress.
OptionsHouse was founded in 2005 by Peak6, an options market making firm that decided to leverage its expertise in options by building a retail brokerage. In 2014, General Atlantic, a private equity firm with a long track record of successful deals in the financial markets, bought a majority stake in OptionsHouse and merged it with another retail brokerage firm, tradeMonster.
As of June, the company had approximately 154,000 customer accounts with $3.6 billion in customer assets. The company's strength is in options – more than 60% of its volume – but it also has a small futures arm, and E*Trade officials said they plan to integrate futures trading into its offerings and build a "best in class" product for retail traders.
Driving the deal is an appreciation for the growth potential in retail trading of derivatives, and options in particular. Options traders are an especially valuable customer segment because of higher commissions and more frequent trading. "When we look at derivatives base commissions, especially in the options base, the frequency of which traders engage in that space and the growth of the market segment over the past few years is something that we find very compelling about this transaction," commented Michael Pizzi, E*Trade's chief financial officer, on the July 25 call.
